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How to Keep Stashing Through Storms (and Trade Wars)

March 23, 2018

3 min read

There’s never a dull moment in the markets.

Markets are reacting to the unexpected news of a potential trade war with China. It’s true that we are in uncharted waters. While Americans have lived through trade wars and tariffs in the past, President Trump cites national security and protecting intellectual property–American innovation and technology–as reasons for the tariffs.

Here’s the thing:

For first-time investors, seeing the market suddenly start going up and down like a roller coaster can be nerve wracking. Here’s our advice:

Turn on Auto-Stash and keep on adding small amounts into your investments on a regular basis. That’s called dollar-cost averaging, and it’s really important. When you use dollar-cost averaging, you buy more shares on the dips, and fewer on the market highs, which will reduce the average cost you pay for shares over time.

While times may seem strange, market volatility is normal.

We’ve been in a tremendous bull market for a number of years now. Our economy is in solid shape — so solid in fact that the Fed has continued to raise interest rates. Markets have been trading at all-time highs.

Don’t think about the daily or weekly or monthly volatility. Think about the long term and the remember, the markets do go up and down.

If you take a longterm view, markets do go up. On average, if you look at the last 100 years, markets increase slightly more than 8% a year. Going forward, many experts predict a long-term expected annual return for US large cap stocks (i.e., the S&P 500) of 5.9%.”

That said, there are some years where the market is strong and some years where things are pretty bad. This is why you’ve just got to take that long term view when you’re thinking about investing.

So we may be entering a trade war. What can you do?

There are two approaches that we always think about. The first one is you can always move to less volatile investments. If you’re anxious, add bonds to your portfolio. They’re good long-term investments that can help dampen the fluctuations in your returns.

The other option that you have is to ride through the downturn and, if you’ve got little bits of money, periodically add little bits more over time, because you’re effectively dollar-cost averaging, as I’ve said above.

What is a trade war?

You can read our longer piece here. But in short, a trade war is when countries engage in a tit-for-tat over tariffs. In response to U.S. tariffs on Chinese goods and services, China could impose tariffs of its own on U.S. steel, as well as other exports.

The tariffs could also increase costs for U.S. consumers, and reduce demand for U.S. exports, which could dent our economy, according to experts.

How might tariffs increase costs at home?

Think of it this way: just about every manufacturer in the U.S. depends on steel, and costs for steel are about to go up. Businesses that use steel, or sell steel products, are likely to make up for the price increases by passing the higher costs along to consumers.

Over the last 20 years, the U.S. has entered into numerous trade treaties, the most famous of which is perhaps the North American Free Trade Agreement (NAFTA). These treaties, which are complex multilateral agreements that favor negotiations between all countries that sign, have reduced the threat of trade wars, in part by eliminating many tariffs on exported and imported products.

Trump has argued such agreements have flooded the U.S. with cheaper foreign-made goods, which make it difficult for U.S. manufacturers to compete.

In 2017, the U.S. signed a less comprehensive trade treaty with China, but Trump has said recently that products from China have cost the U.S. 6 million jobs, and have caused 60,000 factories to close. Economists reportedly dispute these figures.

Zoom out and look at the big picture.

Don’t think about the daily or weekly or monthly volatility. Think about the long term.

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